Tuesday, February 26, 2013

Founders to the Rescue: Barnes and Noble, Best Buy, and Dell

Founders to the Rescue: Barnes and Noble, Best Buy, and Dell

With Leonard Riggio’s announcement that he’s interested in buying the retail and online businesses of Barnes and Noble, three companies are now weighing bids from their founders/chairmen.   For the better part of six months, Richard Schulze, former chairman of Best Buy has been trying to pull together the financing to acquire the company.  And of course, Michael Dell, founder and chairman of Dell Inc. has put forth a proposal along with Silver Lake to take the company private.

The stocks of all three companies are selling at a fraction of their all-time high price due, in large measure, to fundamental challenges facing each of the businesses and their respective industries.  Each of these founders appears willing to put a substantial part of his net worth, as well as his reputation at risk, in order to reverse the downward course of the companies.  In all three instances, independent committees of the board will try to tread a narrow path between the chairman/founder’s inside knowledge and the skepticism of institutional investors.   Special Committees spend a lot of time with lawyers, bankers and each other trying to sort through the myriad of issues and conflicts.

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For all the similarities, these three deals are in very different places.  Michael Dell appears to have had the equity and debt financing to carry out his proposed buyout when he approached Dell’s board a couple of weeks ago.  At age 48, Mr. Dell is also at a stage in his life where managing a challenged, as well as leveraged business, seems like a reasonable undertaking.

Mr. Schulze, 72, was ousted as chairman last year after failing to report his knowledge of an affair by the then-CEO Brian Dunn and an employee.  A few months later, Mr. Schulze approached the board about buying the company.  However, he had not lined up the financing, and has had to ask the board for a couple of extensions in order to try to piece together a deal.  Even if he puts together the equity and debt, Mr. Schulze will have to take a very active role in order to try to reverse the fortunes of Best Buy.

In recent days, Mr. Riggio[1], 71, approached the Barnes and Noble board to propose a buyout.  However, he did not indicate a price or a means for financing the deal.  In fact there are real questions about the value of the retail and online operations of BNS.  Until very recently, it appeared that the electronic book division, manufacturer of the Nook, might be worth as much as the entire company.  However, holiday sales for the Nook were disappointing, so it’s become unclear what the electronic business is now worth, and therefore what Mr. Riggio might have to pay for the rest of the company.  In any event, the check that Mr. Riggio might write to acquire the business is tiny (measured in the hundreds of millions) compared to the amount of money Mr. Schulze and Mr. Dell have to come up with.         

On the one hand, I give the three founders credit for attempting to reverse the fortunes of their respective companies.  On the other hand, the computer, electronic retail, and book selling businesses are littered with bankruptcies and out right liquidations.  Investors are left to wonder if Messrs. Dell, Schulze, or Riggio are acting with through their hearts or their minds.

[1] Technically Mr. Riggio is not the founder of Barnes and Noble.  He acquired the company in 1971, and built out the big box chain from a single retail store on 5th avenue.

1 comment:

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